Introduction to Absolute Return and Hedge Funds

Absolute Return funds, also often called "Hedge" funds, are a type of managed fund that comes under a general heading of Alternative Investments. The broad objective of most Absolute Return funds is to produce a positive return in both rising and falling markets, and as such they can provide useful diversification of both risk and returns when part of an investor's overall investment portfolio. Although the performance of most funds are frequently compared with overall asset and share markets, the objective of many Absolute Return fund managers is to have a low correlation to the performance of traditional asset classes such as share markets.

In Australia, there are over a hundred Absolute Return managers, all of whom have to be licensed by the Australian Securities and Investments Commission (ASIC). These managers offer over two hundred different funds across a variety of Investment Strategies and styles, different underlying assets, and a range of geographic mandates.

The majority of Absolute Return funds, both in Australia and Worldwide, trade shares or equities and are known as Equity Long/Short funds. However there are variations within the overall Equities strategy, with some managers trading "long only", while others trade dedicated "short" strategies. Other variations within the equity space include Equity Market Neutral, Pairs Trading and Relative Value strategies. Other funds trade or invest in commodities, currencies and fixed income markets, with some recent additions including Carbon Markets and Litigation Funding.

This creates a wide choice for the prospective investor, made more difficult by the fact that many funds trade derivatives and other financial instruments in local and overseas markets not generally understood by many investors. Volatile financial markets, coupled with gearing and sometimes a lack of transparency, provides different risks for investors, and recently hedge funds have received (sometimes unfairly) negative publicity for creating market volatility by "short selling" stocks.

Read our Getting Started Articles to learn more about alternative investments, absolute returns and hedge funds.

Refer to our Glossary for definitions of industry terms.